Chapter 13, Problem 5CP

Summary Introduction

(a)

To Determine:

The value of share should be determined by using constant growth model and the capital asset pricing model.

Introduction:

The value of share can be calculated by the use of two models:

1. Constant Growth Model − It is also known as Gordon Growth Model which equates the value of share to the present value of stock's future dividends.
2. The capital Asset Pricing Model- This model explains the relationship between systematic risk and expected return of assets.

Summary Introduction

(b)

To Determine:

The sustainable growth rate should be determined for Rio National by using balance sheet of 2009.

Introduction:

For any company or organization, sustainable growth rate plays an important function to deal with being over-leveraged and avoid financial stress.

It involves in maximizing sales and revenue growth without raising any financial leverage.